blockworks.co
If there’s one thing the crypto industry hates more than government oversight, it’s the prospect of a free and open internet.
This might sound contradictory to the entire ethos of the crypto space, but I believe that the most powerful players actually desire centralized authority, deregulation and boosting their portfolios at the expense of the collective wellbeing of online users.
In other words, they want to become the next Big Tech. It’s the complete opposite of what most people in this space believe in.
A bill highly lauded by the crypto industry, known as FIT21, recently won a bipartisan majority in the House. While this bill has seized the discourse, it isn’t all that advocates think it is. Worrisome aspects of FIT21 have not gotten enough attention.
Should it reach Biden’s desk, the legislation would relax securities regulation so that cryptocurrencies have more leeway to be treated as commodities rather than investment contracts — despite the persistent market volatility of most currencies. To achieve this, the act would take away the authority of one government agency (the Securities and Exchange Commission) and give it to another (the Commodity Futures Trading Commission).
There’s a significant reason for what might appear to be a trivial bureaucratic maneuver. FIT21 is largely a retaliation against SEC Chair Gary Gensler, the government official responsible for determining whether individual cryptocurrencies count as securities or not.
Gensler has mostly remained steadfast in the affirmative. (Earlier this year, he did capitulate to the industry to avoid a drawn-out court case, making an exception for bitcoin by deeming it a “non-security commodity”.) In response, crypto elites have thrown their hands in the air in feigned confusion: The government is persecuting them and won’t explain why! Bureaucrats like Gensler must hate innovation; worse yet, they want to thwart the American Dream.
Crypto whales have lobbied Congress to back the legislation because they want to continue to earn a profit on their investments tax free. But when you parse through it, the bill reveals something else. The whales don’t actually care about the most fundamental tenet of Web3: decentralization.
It is this particular detail, rather than the one about treating crypto as a commodity, that reveals the industry’s predilections toward replicating Big Tech.
Why not cooperate?
What’s boggling is that FIT21 is likely unnecessary. The crypto industry has a credible path to avoid securities regulation that it chooses not to pursue.
Last year, a group of legal experts co-authored a white paper outlining how founders and investors could convert their enterprises into cooperatives. They state outright in the paper’s introduction that “the SEC has consistently declined to classify cooperative memberships as securities.” The HBAR Foundation, which stewards the Hedera network, tweeted support for the paper, while Variant Fund included it in a link dump. However, it didn’t receive coverage in crypto-focused media.
So, why is crypto not taking the paper’s advice?
There are technical solutions to make one-person-one-vote — the typical approach to how members of cooperatives legislate decisions together — possible in the blockchain space. Token-weighted voting doesn’t need to be the only option for governance. But leveling the playing field would instantly kill the value of existing tokens, and protecting those prices matters far more than fighting for a decentralized net.
Instead, founders and investors have opted for theatrics over substance, insisting that Web3 is “sufficiently decentralized.” That’s a deliberate choice of phrase. In 2018, an SEC director gave a speech suggesting that so long as cryptocurrencies were distributed in a “sufficiently decentralized” manner, they could avoid the Howey test, the legal standard which the commission follows to determine investment contracts.
According to the Howey test, an individual invests in a product in part because they know that a person or a fixed group of people is behind it. As a workaround, dapps and other crypto enterprises sought to diffuse themselves, minting their own governance tokens and dispersing this equity through airdrops to early users so as to compensate freelancers and fund regular grants/bounties programs.
Because the SEC never elucidated the parameters of decentralization, the crypto industry opted to spin it as a marketing strategy. The carefree dispersal of tokenized equity manufactured the appearance of countless users inheriting governance power. Altogether, it was an attempt to sidestep Howey’s provision that an investor understands that a defined person or team of people oversees the product. And yet, users weren’t ultimately inheriting all that much power.
The hope was that staging a spectacle of decentralization would satisfy the SEC, while at the same time entrance crypto enthusiasts and turn their collective gaze away from the growing presence of Silicon Valley firms investing millions in new projects.
The point of FIT21
These efforts have proved insufficient in the eyes of Gensler, which is why the crypto lobby has chosen to defy the SEC and render Howey irrelevant.
FIT21 proposes that in order for a crypto enterprise to be decentralized, neither the founder nor any “affiliated person” can own more than 20% of the token supply. By this logic, four individuals can each hold 19%. And even if they are members or affiliates of the founding team, they wouldn’t need to worry about facing securities regulation because this legal definition of decentralization would help them get around Howey.
But the parameters might not even matter. It’s unclear how FIT21 accounts for users with multiple crypto wallet addresses who could anonymously commit backdoor centralization by dividing up their token holdings between wallets. The legislation gives enterprises the ability to self-certify their decentralization, but it doesn’t provide additional resources to the SEC to keep pace with what would be an inevitable flood of certifications.
Read more from our opinion section: Hey regulators, here’s how to get crypto right
FIT21’s chances of getting a vote in the Senate are minuscule given the higher density of anti-crypto Dems than in the House. Its chances are even dimmer following Biden’s recent veto of a separate crypto bill.
The crypto industry would rather celebrate a dead on arrival bill and continue to sink who knows how many thousands of dollars into SEC court battles, than consider the viability of funding democratic user ownership — which, unlike their previous ploys, would actually be faithful to the vision of Web3 — and thus appease Gensler on the grounds of securities law.
Behind the ridiculousness of it all, there is a long-term strategy. Silicon Valley players are making a bet that, should Big Tech start to crumble, Web3 could emerge in its wake, and they want to ensure that the laws regulating the technology are gamed in their favor. In the years to come, the crypto lobby will continue to push for legislation like FIT21 with its anti-user definition of decentralization.
The vision behind Web3 — a universally owned and governed internet powered by blockchains and cryptocurrencies that are financially rewarding and transparent to everyone — is admirable, and doesn’t get the credit it deserves in mainstream media.
Can you blame the haters, though?
FIT21 might seem like a populist achievement, but for those of us who care about the free and open web, let’s be honest with ourselves: Will this bill (and future bills like it) get us closer to an authentic Web3, or Big Tech 2.0?
Unfortunately, all signs point to the latter.